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Management of technology and the taxation aspects of research and development – An Australian perspective

Dipnarayan Guha1, Samip Talwar and Kishan Arava
dip@atyadvisory.com.au; sam.talwar@atyadvisory.com.au; kishan.arava@atyadvisory.com.au

The current Research & Development (R&D) Tax Incentive Scheme administered by the Australian Government with an aim to support innovation through company tax offsets has been the subject of many recent discussions on better targeting. The Scheme derives many of its principles from the collection of R&D statistics outlined in the OECD-published Frascati Manual, the latest version of which was released in 2015. The Manual outlines that for an activity to be classified as a R&D activity, it must satisfy five core criteria and be: (a) novel; (b) creative; (c) uncertain; (d) systematic and (e) transferable. Experimental development is defined in the Manual as systematic work that is drawn on knowledge gained from research and practical knowledge to produce new knowledge and ultimately new and improved products and processes. This definition has been adopted in the Australian legislative definition of a “Core R&D Activity” in Section 355.25 of the Income Tax Assessment Act 1997 (Cth.), and extended to cover materials, devices and services. In order to claim the R&D Tax Offset successfully, a company operating through a permanent establishment in Australia must identify at least one Core R&D Activity in accordance with this legislation and lodge an Australian company tax return with its identified R&D expenses. This process is entirely self-assessed by the claiming company which is required to maintain all R&D-related documentation for compliance in accordance with Section 262A of the Income Tax Assessment Act 1936 (Cth.)

 The philosophy around this self-assessment process has seen recent ongoing discussions between taxpayers, R&D tax advisors and the Australian Government in the light of proposed legislation reform introduced in the Australian House of Representatives in December 2019. Public consultation was organized by the Treasury over June – July 2018 and inputs sought on the proposed new legislation and its exploratory materials, with consensus emerging that greater clarity and governmental guidance was necessary to companies correctly identifying R&D activities in accordance with legislation. The Manual recognizes that R&D activities always need to be considered in an organizational context and the type of business conducted. There can thus be different ways in which a Core R&D Activity is identified by companies in different industries. The Australian Government recognizes this as outlined in the Manual and provides guidance in the form of taxpayer alerts on industry-specific R&D claims broadly aimed at all companies conducting R&D activities in that industry sector. This has been the subject of discussion in recent times as to whether the guidance should further consider including the size, scope and structure of the organization. The meaning of systematic in a R&D context as outlined in the Manual is that the R&D activity must be conducted in a planned manner, with records kept of the process followed and the outcome. The Manual recognises that its outlined principles can apply to both large organisations and small-sized businesses, but does not specifically lay out any best practices that a small business or startup may adopt while recording its R&D statistics effectively. Consequently, there is a lot of uncertainty among startups and small businesses to correctly identify their conducted R&D activities, which poses major tax compliance risks involving R&D claims. There is thus a compelling need for management and technology professionals to work with academia, R&D tax advisors and the Australian Government to develop a book of knowledge aimed at best practices for R&D statistics reporting in small businesses. Such an initiative would manage tax compliance risk associated with R&D claims and provide standardized practice tools that technology managers and researchers involved in conducting R&D with startups and small businesses could effectively utilize in reporting R&D statistics.

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